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Organizational Design and Technology Choice with Nonbinding Contracts

Author

Listed:
  • Lars Stole

    (University of Chicago, GSB)

  • Jeffrey Zwiebel

    (Stanford University, GSB)

Abstract

We present a new methodology for studying the problem of labor contracting within a firm's boundaries where contracts provide only a minimal commitment to wages and employment. Given the peculiar contractual incompleteness of labor contracts, the resulting wages and profits under an interesting class of complete information bargaining games distort the technological and organizational decisions facing the owner of the firm's capital. We show that in such settings where labor contracts are nonbinding, these decisions are distorted in an economically distinct way compared to the standard neoclassical firm. Among other things, we demonstrate that a firm with a nonbinding contractual basis will, relative to a neoclassical firm, (i) overemploy labor, (ii) underemploy capital, (iii) choose inefficient ``frontloaded'' technologies, (iv) de-emphasize scale and scope economies, and (v) inefficiently allocate labor across productive assets. We apply our analysis to product market competition, unionization, hierarchical management, and horizontal mergers.

Suggested Citation

  • Lars Stole & Jeffrey Zwiebel, 1993. "Organizational Design and Technology Choice with Nonbinding Contracts," Game Theory and Information 9310001, University Library of Munich, Germany, revised 13 Oct 1993.
    • Handle: RePEc:wpa:wuwpga:9310001
    Note: 34 pages, uuencoded postscript file
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    References listed on IDEAS

    as
    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Ichiishi,Tatsuro, 1993. "The Cooperative Nature of the Firm," Cambridge Books, Cambridge University Press, number 9780521414449.
    3. Roger B. Myerson, 1978. "Conference Structures and Fair Allocation Rules," Discussion Papers 363, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    Cited by:

    1. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
    2. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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